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The Wise Investor
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Table of Contents
Put your financial adviser on a leash
February 11, 2000
100% Foreign content for your RSP
December 22, 1999
Tax Loss Selling or Dealing With Your Mistakes
November 26, 1999
Life Stages of your RRSPs
November 12, 1999
Just give me boring (but great) rates of return
November 3, 1999
De-mystifying Demutualization - part Two
October 25, 1999
De-mystifying Demutualization - part One
October 19, 1999
Seg funds for the simple minded
September 14, 1999
The interest rate game Part 2
August 12, 1999
The interest rate game Part 1
July 30, 1999
Choosing funds: Five for the long run
July 14, 1999
New Funds: To buy or not to buy
July 2, 1999
Making sense of momentum investing
June 18, 1999
Rating the fund managers
June 4, 1999
Resource recovery hinges on supply and demand
April 30, 1999
Tech funds draw strength from favourable trends
March 24, 1999
Withdrawing from your RRSP
March 9, 1999
The economic implications of the euro - An interview with Ranga Chand
February 12, 1999
Underperforming small-cap funds have strong upside potential
January 29, 1999
How to pick a winning equity fund portfolio
January 15, 1999
View the Weekly Insight archive

Withdrawing from your RRSP

Winning the Tax Game

[ Book Cover ] This article has been excerpted with permission from Tim Cestnick's Winning The Tax Game: A year-round tax and investment guide for Canadians, published by Prentice Hall Canada Inc.
Click here to buy the book
From Winning the Tax Game
Tuesday, March 9, 1999

You’ve worked hard to put money aside in your RRSP. At some point, those funds are going to be withdrawn from the plan. Most commonly, you’ll withdraw them once you’ve decided to retire and you need a steady income from those investments. But there may be times in life when you decide that you need to make RRSP withdrawals sooner.

Before jumping at the chance to pull money out of your RRSP for reasons other than retirement, stop and think twice. You stand to give up plenty of growth in your RRSP by making withdrawals early. Want proof?  Consider the cost of RRSP withdrawals shown in the graph (click here to view graph). If you make a $5,000 withdrawal from your RRSP and you have 30 years to go before retirement, you’ll give up $87,250 in retirement savings because of your withdrawal, assuming a 10 percent return on your money. A $20,000 withdrawal with 20 years to go before retirement will cost you $134,550!

If you still plan to make withdrawals from your RRSP, there are some tax-efficient ways to do this. Let’s take a look at them.

Tim's Tip 73: Make RRSP withdrawals during periods of no or low income.

There’s no doubt that at certain time in your life you might find yourself strapped for cash. During these times, your RRSP can act as a source of income if need be. IT could be that you’re unemployed, on disability leave, or on maternity or paternity leave. Perhaps you’re launching a new business and haven’t started generating any income yet. In any event, these times of no or low income may allow you to make very tax-efficient withdrawals from your RRSP.
If you make withdrawals from your RRSP, the tax collector will not give back contribution room for you to make up that withdrawal later. That is, you'll lose that contribution room forever! This has to be considered a cost of making withdrawals over and above the tax you might pay on any withdrawals.

You see, every Canadian resident is entitled to the basic personal amount plus a supplementary tax credit, which combined will effectively shelter your first $6,956 ($6,707 in 1998) of income from any tax. Once your income is higher than this, the supplementary credit is clawed back by up to $500. The bottom line is that, if you had no other income, you’d be able to withdraw $6,956 from your RRSP and not pay a cent of tax on that income. Even if your income is over $6,956, you’ll still enjoy Canada’s lowest marginal tax rate, about 26 percent, on taxable income below $29,590.

You should realize that you’re going to face withholding taxes when you make withdrawals from your RRSP. The withholding tax is 10 percent on withdrawals of $5,000 or less, 20 percent on withdrawals of $5,001 to $15,000, and 30 percent on withdrawals over $15,000. The percentages in Quebec are 21, 30 and 351 percent respectively. Think of these withholdings as installments on your taxes. In most cases these withholdings won’t be enough to satisfy your full tax bill on the RRSP withdrawal, and you’ll have to make up the difference when you file your tax return for the year of the withdrawal. In other cases, if your income is low enough, you may get back some of those withholdings as a refund when you file your return. If you want to keep these withholdings to a minimum, be sure to limit each withdrawal to $5,000 or less.

To make a long story short:

  • Withdrawing funds from your RRSP can be done tax-efficiently if your income is low, thanks to the basic personal and supplementary credits totaling $6,956 ($6,707 in 1998).
  •  Withdrawals will be subject to withholding taxes, which are simply installments toward your eventual tax bill.

Note: 1. The percentages in Quebec have changed. They are now 25 percent on withdrawals of $5,000 or less, 33 percent on withdrawals of $5,001 to $15,000, and 38 percent on withdrawals over $15,000.

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